January 28, 2022

Dow Inc. (DOW) CEO Jim Fitterling on Q4 2021 Results – Earnings Call Transcript

Dow Inc. (NYSE:DOW) Q4 2021 Results Conference Call January 27, 2022 8:00 AM ET

Company Participants

Pankaj Gupta – VP, IR

Jim Fitterling – Chairman and CEO

Howard Ungerleider – President and CFO

Jim Fitterling

Thank you, Pankaj.

Beginning with slide 3, in the fourth quarter, Dow once again delivered top and bottom line growth year-over-year with sales growth and margin expansion in every operating segment. Our results reflect the strength and resilience of our advantaged portfolio and the incredible efforts of the Dow team as we continue to ensure well-being and safety of our team and our communities.

We delivered year-over-year sales growth of 34%, with gains in every operating segment, business and region. While volume declined 4% year-over-year due to supply constraints from several factors, including our own maintenance, lingering effects of weather-related outages and global logistics challenges, we continue to see robust underlying demand across our end markets, particularly for higher-margin downstream and sustainability-led applications. Prices were up 39% year-over-year, reflecting gains in all operating segments, businesses and regions.

Our discipline and agility enabled us to navigate the supply constraints and logistics challenges I just mentioned, dual control actions in China and rising energy costs. We delivered operating EBIT growth of $1.2 billion year-over-year, with margin expansion in every operating segment. Equity earnings were also up year-over-year with margin expansion at our joint ventures in Saudi Arabia, Thailand and Kuwait. These results translated into significant cash generation for the quarter, with cash flow from operations of $2.6 billion, up $901 million year-over-year and cash flow conversion of 88%. And we returned $912 million to shareholders in the quarter, including $512 million through our industry-leading dividend and $400 million in share repurchases.

Our performance in the fourth quarter capped a record year for Dow, which you will see highlighted on slide 4. In 2021, Team Dow capitalized on the economic recovery, achieving record sales and earnings performance despite pandemic-driven uncertainty and industry-wide weather-related challenges. Our focus on cash flow and disciplined capital allocation enabled us to continue to deliver on our financial priorities.

We achieved $7.1 billion of cash flow from operations, bringing our total cash flow from operations since spin to $18 billion. We enhanced our balance sheet by reducing gross debt by another $2.4 billion in the year, bringing down gross debt by more than $5 billion since spin. We have also no substantive debt maturities until 2026. We proactively funded our U.S. pension plan, and successfully executed Sadara’s debt reprofiling, lowering Dow’s guarantees by more than $2 billion. Dow has returned a total of $7.3 billion to shareholders since spin through our dividend and share repurchases, including $3.1 billion in 2021. And we kept CapEx well within DNA as we continued to invest in our higher return and faster payback growth investments. In 2021, we achieved a return on invested capital of greater than 22% on strong earnings growth.

As we turn the corner on the pandemic, we do so with a strong balance sheet and a deliberate and disciplined strategy to decarbonize and grow. We achieved this record financial performance in 2021 while advancing our ESG leadership. Importantly, we announced our disciplined strategy to decarbonize our assets, while improving underlying EBITDA by more than $3 billion as we capitalize on our participation in attractive, high-growth end markets and sustainability-driven solutions.

Our ESG efforts continue to be recognized externally as we were recently recognized by JUST Capital for the third year. Dow earns a top spot in the chemicals sector overall as well as the number one position in the workers and stakeholders in governance categories in the industry. I’m extremely proud of Team Down’s dedication to deliver for our customers and drive value for all of our stakeholders. We will build on these achievements in 2022 as we advance our ambition.

Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $595 million, up $299 million year-over-year, primarily due to continued price strength. Sequentially, operating EBIT was down $118 million and operating EBIT margins declined 280 basis points, primarily driven by higher energy costs in Europe and our planned maintenance turnaround activity.

The Polyurethanes & Construction Chemicals business increased net sales compared to the year ago period on broad-based price gains in all regions. Volume declines were primarily due to a planned transition away from a low-margin coproducer contract and our planned maintenance turnaround activity.

Howard Ungerleider

Thank you, Jim, and good morning, everyone.

Turning to slide 6. Our diversified portfolio continues to enable us to capitalize on attractive end market trends with higher-margin downstream products. Our four primary market verticals are each growing at rates of 1.3 to 1.5 times GDP and benefiting from sustainability macro trends. We are meeting this demand with higher-margin solutions such as functional polymers, alkoxylates, surfactants, polyurethane systems, sustainable coatings and performance silicones.

In the packaging vertical, demand for lower carbon emissions recyclable and circular materials are driving demand for Dow’s industry-leading plastics portfolio and in-house application design capabilities.

Dow’s broad suite of products and hybrid innovations targeting infrastructure will continue to benefit from government investments and incentives, with particular demand resiliency in the Americas, Europe as well as in the Middle East, Africa and India. We see global demand across the diverse consumer market vertical remaining at elevated levels, particularly for applications like electronics, 5G, appliances, pharma and home care, where several of Dow’s growth investments are targeted. And in mobility, Dow’s portfolio of specialty silicones, polyurethanes and elastomers is uniquely positioned to benefit from growing electric and autonomous vehicle trends. Importantly, these attractive market verticals are supported by favorable balances across our key value chains with continued strength across consumer and industrial end markets, which we’ll see on slide 7.

Jim Fitterling

In Industrial Intermediates & Infrastructure, our alkoxylates and PU systems expansion projects are closely linked with brand owner demand for higher value, differentiated downstream applications across home and consumer care, agricultural and infrastructure end markets. For example, our surfactants offer an improved environmental profile for leading brand owner laundry and home care products. And our polyurethane system PASCAL technology enables up to 10% greater energy efficiency and appliances without raising manufacturing costs.

Arun Viswanathan

Congratulations on a strong year there. I guess, we’ve talked a lot about the polyethylene market. So, maybe I could also just get you to guys to elaborate on your outlook for polyurethanes, as well as silicones. Could you just comment on those two markets as well? Thanks.

Jim Fitterling

Yes. Arun, thank you. Polyurethane market strength in furniture and bedding, appliances, construction, everything related to housing is very good. In that segment, II&I segment also Industrial Solutions, market strength, pharma, home cleaning, food, we have some feed additives in there, crop defense, intermediates for crop defense and electronics are all very strong. And what you see is that the supply-demand is very constructive to the middle of this decade, whether you’re looking at MDI, polyethylene — propylene glycol or ethylene oxide and ethylene oxide derivatives. So, all very strong through mid-decade.

We think that even though automotive is a little bit constrained right now because of semiconductor chip shortages, we expect that’s going to ease throughout the year and especially in the second half is going to be better. Light vehicle production estimates for this year, about 85 million units around the world. That will be up from last year, so that’s positive. Electric vehicle trends are good for us. There’s more content on an EV for us than there is on internal combustion engine vehicle, but both of them continue to look good. So, I think that’s good. A little bit slower, our operating rates on propylene oxide because the new capacity has come on. But net-net, so the systems business, which is a strong driver of the profitability is going to be good.

Just to give you an example on building and construction, we’re looking at kind of 4% market growth rate similar to last year, electronics, 6%. And so, I think we’ve got a good trend in front of us.

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January 27, 2022

Dow Q4 2021 Results

Dow reports fourth quarter 2021 results
FINANCIAL HIGHLIGHTS

• GAAP earnings per share (EPS) was $2.32. Operating EPS1 was $2.15, compared to $0.81 in the year-ago
period. Operating EPS excludes certain items, totaling $0.17 per share, primarily due to certain tax-related
items.

• Net sales were $14.4 billion, up 34% versus the year-ago period, with improvement in every operating segment,
business and region. Sequentially, net sales were down 3% primarily driven by decreased polyethylene volume
due to supply constraints as well as lower olefin and co-product prices.

• Local price increased 39% versus the year-ago period, reflecting gains in all operating segments, businesses
and regions. Sequentially, price increased 1% with gains in Performance Materials & Coatings and Industrial
Intermediates & Infrastructure, led by industrial, construction and personal care applications along with
continued tightness in siloxane supply.

• Volume decreased 4% versus the year-ago period and 3% sequentially, primarily driven by supply constraints
from maintenance and lingering effects from Covid and weather-related outages, as well as global logistics
constraints across several key value chains.

• Equity earnings were $224 million, up $118 million from the year-ago period due to margin expansion at Sadara
and the Thai and Kuwait joint ventures. Sequentially, equity earnings were down $25 million driven by impacts
from planned maintenance turnaround activity at Sadara.

• GAAP Net Income was $1.8 billion. Operating EBIT1 was $2.3 billion, up $1.2 billion from the year-ago period,
with gains in every operating segment due to margin expansion and increased equity earnings. Sequentially,
operating EBIT declined $621 million as price gains in Performance Materials & Coatings and Industrial
Intermediates & Infrastructure were more than offset by increased raw material and energy costs and supply
constraints.

• Cash provided by operating activities – continuing operations was $2.6 billion, up $901 million year-over-year
and a decrease of $162 million compared to the prior quarter. Free cash flow1 was $2.1 billion.

• Returns to shareholders totaled $912 million in the quarter, comprised of $512 million in dividends and
$400 million in share repurchases.

CEO QUOTE
Jim Fitterling, chairman and chief executive officer, commented on the quarter:

“In the fourth quarter, Team Dow once again delivered top- and bottom-line growth year-over-year across all
operating segments. Underlying demand strength and continued operating discipline enabled us to overcome
supply and logistics constraints as well as higher raw material and energy costs.

“Our performance in the fourth quarter capped a record year for Dow in 2021. We achieved full year sales of
$55 billion and operating EBIT of $9.5 billion, with growth and margin expansion across all operating segments, as
well as $7.1 billion of cash flow from operations and annual ROIC of more than 22%. We delivered on our financial
priorities with proactive liability management actions through the year, including reducing gross debt by $2.4 billion
and a $1 billion elective pension contribution, while returning a cumulative $3.1 billion to shareholders. Importantly,
we also announced our plan to decarbonize our assets while growing our earnings, positioning Dow to continue on
a path to deliver more than $3 billion of accretive underlying earnings growth, advance our sustainability leadership,
and create long-term value for our shareholders.”

Industrial Intermediates & Infrastructure segment net sales in the quarter were $4.5 billion, up 30% versus the year ago
period. Local price improved 38% year-over-year with gains in both businesses and in all regions on continued
strong industry demand. Volume declined 7% year-over-year due to a planned transition away from a low-margin
coproducer contract and planned maintenance turnaround activity. On a sequential basis, the segment recorded a
net sales increase of 1%, with local price gains in both businesses and all regions. Volume declined 2% sequentially
as improved supply availability in Industrial Solutions was more than offset by planned maintenance turnaround
activity in Polyurethanes & Construction Chemicals.

Equity earnings were $90 million, an increase of $54 million compared to the year-ago period, driven by margin
expansion at the Kuwait joint ventures. On a sequential basis, equity earnings decreased by $32 million, primarily
from lower supply availability at the Sadara joint venture due to planned maintenance turnaround activity.
Operating EBIT was $595 million, an increase of $299 million compared to the year-ago period, primarily due to
continued price strength in both businesses, driving Op. EBIT margins up 460 basis points year-over-year.
Sequentially, Op. EBIT was down $118 million, and Op. EBIT margins declined by 280 basis points, primarily driven
by energy cost increases in Europe and planned maintenance turnaround activity.

Polyurethanes & Construction Chemicals business increased net sales compared to the year-ago period as tight
supply and demand balances in key value chains led to broad-based price gains in all regions. Volume declines
year-over-year were primarily driven by a planned transition away from a low-margin coproducer contract and our
planned maintenance turnaround activity. Sequentially, net sales declined as local price increases in all regions
were more than offset by planned maintenance turnaround activity.

Industrial Solutions business net sales increased from the year-ago period with local price gains in all regions.
Volume was flat year-over-year as higher volume from a renewable energy contract was offset by fewer licensing
and catalyst sales. Net sales increased sequentially on volume growth from improved supply availability and local
price gains in all regions.

Performance Materials & Coatings segment net sales in the quarter were $2.6 billion, up 26% versus the year-ago
period. Local price increased 30% year-over-year, with gains in both businesses and in all regions. Volume declined
4% year-over-year as stronger demand for performance silicones applications and architectural coatings in the U.S.
& Canada was more than offset by lower siloxane supply availability due to a pull forward of maintenance activity
to coincide with dual-control actions in China. On a sequential basis, net sales were up 1% with local price gains in
both businesses and in all regions. Volume declined 8% sequentially as increased supply availability of acrylic
monomers was more than offset by maintenance activity at a siloxane facility in China and lower seasonal demand
for coatings applications.

Operating EBIT was $295 million, compared to $50 million in the year-ago period, as Op. EBIT margins increased
900 basis points due to strong price momentum for silicones and coatings offerings. Sequentially, Op. EBIT
improved $11 million, as price gains were partly offset by planned maintenance turnaround activity.
Consumer Solutions business achieved higher net sales, with local price gains in all regions and end-market
applications year-over-year. Volume declined versus the year-ago period, as strong demand particularly for
industrial, electronics and personal care applications was offset by lower supply availability due to a pull forward of
maintenance activity to coincide with dual-control actions in China. Sequentially, net sales were up as local price
increases in all regions and end-market applications more than offset volume declines, primarily due to maintenance
activity at a siloxane facility.

Coatings & Performance Monomers business achieved increased net sales compared to the year-ago period, led
by local price gains in all regions on tight supply and demand balances and higher raw material costs. Volume
declined year-over-year as stronger demand for architectural coatings and industrial coatings primarily in the U.S.
& Canada was more than offset by lower merchant sales of acrylic monomers partly due to Dow’s own higher-value
captive use. Sequentially, the business delivered local price gains in all regions. Volume declined sequentially due
to seasonal demand declines for coatings applications in the Northern Hemisphere.

OUTLOOK
“In 2022, we expect continued demand strength across our end markets, supported by growing industrial production
and sustained consumer spending,” said Fitterling. “We are working hard to normalize operating rates, inventory
and service levels following a year of supply constraints and Covid-related logistics challenges.

“While the global economy continues to be impacted by supply chain pressures, these logistics constraints are
expected to ease throughout the year to fulfill elevated order backlogs and pent-up customer demand. As we
navigate these near-term dynamics, we will continue to be disciplined in the implementation of our strategy and
progress on our higher-return, lower-risk growth projects and efficiency programs. We will also further advance our
key sustainability initiatives to decarbonize our assets and capture increasing demand for lower carbon and circular
solutions.”

https://corporate.dow.com/en-us/news/press-releases/dow-reports-fourth-quarter-2021-results.html